Test 2-Chapter 7: Bond Markets

Question 1

Capital markets have securities that are _____ term.

Answer 1

long term, a year or more

Question 2

Capital markets not only include debt, but ____ as well.

Answer 2

equity

Question 3

Which Capital market instrument does this describe?
“ no default risk, active secondary market, very liquid, can be bought and sold 24/7, globally and domestically traded, and rate is set by the market”

Answer 3

Treasury Bonds

Question 4

Which Capital market instrument does this describe?

US government issued, 2,3,5,7 and 10 year maturities, the ten year rate is considered a benchmark”

Answer 4

Treasury Notes

Question 5

Which Capital Market instrument does this describe?
Us gov't issued
began in 1996
lower coupon than comparable treasuries
5, 10, and 30 year maturity

Answer 5

Inflation-indexed treasuries (TIPS)

Question 6

How do inflation-indexed treasuries or TIPS work, in regards to the interest rate and inflation?

Answer 6

the interest rate goes up or down with inflation

Question 7

If inflation is really high, is it a good time to buy TIPS?

Answer 7

no

Question 8

Who issues municipal bonds?

Answer 8

local and state governments

Question 9

Are municipal bonds credit rated?

Answer 9

yes

Question 10

Which is more riskier a t-bond or municipal bond?

Answer 10

municipal bond

Question 11

Which is more liquid a t-bond or municipal bond?

Answer 11

municipal bond

Question 12

What is the nice feature about municipal bonds?

Answer 12

tax deductible interest

Question 13

What are the two types of municipal bonds?

Answer 13

revenue and general obligation

Question 14

Which type of municipal bond is safe and why?

Answer 14

general obligation because they can always just raise taxes, because general obligation bonds are backed by taxes

Question 15

Why are revenue bonds more unsafe?

Answer 15

because they’re backed by project revenue and not every project generates enough revenue

Question 16

Who sells municipal bonds?

Answer 16

banks

Question 17

Is there any active secondary market for muni bonds?

Answer 17

not really

Question 18

How do most investors get into municipal bonds?

Answer 18

mutual funds

Question 19

What capital market instrument?
long-term company debt
10-30 years
call and convertibility features

Answer 19

corporate bonds

Question 20

Why would companies put a convertibility feature on their bonds?

Answer 20

gives investors incentive to buy their bonds

Question 21

A debenture is an ________ bond.

Answer 21

unsecured

Question 22

What does a debenture bond mean?

Answer 22

bond isn’t backed by a fixed asset

Question 23

What items qualify as collateral

Answer 23

real estate, bonds, and stock

Question 24

What does this describe?
contract, lays out all the details, legal contract filed with government, gives all the details (convertible, call, coupon, interest and how often it will be paid)

Answer 24

bond indenture

Question 25

the prices on corporate bonds are driven by maturity, rating, the market, and ______

Answer 25

liquidity

Question 26

In regards to corporate bonds, the long the maturity, the ____ risky, because buyers want more interest if they are tying their money up for long time.

Answer 26

more

Question 27

Not all bonds are super liquid therefore the less liquid, and the _____ interest demanded

Answer 27

interest

Question 28

Is there an active secondary market for corporate bonds?

Answer 28

yes

Question 29

Bonds must be rated what or higher to be considered investment grade?

Answer 29

BBB or Baa

Question 30

Microsoft, J&J, and Exxon are the only firms in S&P 500 with what?

Answer 30

AAA rating

Question 31

What are junk bonds?

Answer 31

bonds rated below investment grade

Question 32

50% of corporate bonds are rated _____

Answer 32

junk

Question 33

Do treasuries have any default risk?

Answer 33

no

Question 34

what kind of risk does this describe?

asset/security that cannot be traded quickly enough to prevent a loss

Answer 34

liquidity risk

Question 35

Are corporate bonds riskier than muni bonds?

Answer 35

no, can’t assign a specific risk because both have default risk

Question 36

How can muni bonds offer lower yields than treasuries?

Answer 36

because munis are subsidized by the government and the interest is backed

Question 37

Do most bonds offer collateral?

Answer 37

no most are debenture bonds or unsecured

Question 38

What makes a bond junk

Answer 38

Below BBB

Question 39

What happens to the value of the bond when interest rates rise?

Answer 39

value of bond decreases